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Mercury Quarterly Operational Update

Otahuhu spot price at record as hydro storage declines with thermal outages on the horizon

Spot prices were elevated during the quarter, increasing post-winter as the market responded to below-average inflows and major thermal fuel and generation outages scheduled in Q2-FY2020. This resulted in average spot prices for the quarter reaching a record $125/MWh at Otahuhu and $112/MWh at Benmore.

National hydro storage fell from 106% to 83% of average over the quarter driven by South Island inflows being 102GWh below average1. The uncorrelated nature of North Island inflows was demonstrated as Waikato catchment inflows were 72GWh above average1 in the 3 months to 30 September 2019. Consequently, Mercury's FY2020 forecast hydro generation has been increased by 50GWh to 4,070GWh.

Hydro generation declines versus PCP but remains above-average

Mercury's Q1-FY2020 hydro generation of 1,214GWh decreased by 232GWh from the prior comparable period but remained 21GWh above average2. Reduced hydro generation volumes enabled increased utilisation of Waikato Hydro Scheme flexibility. Mercury's LWAP/GWAP ratio decreased favourably from 1.07 in Q1-FY2019 to 1.04 in the most recent quarter.

Value focus encompasses risk management, rewarding loyalty and bias towards C&I sales

Mercury is proactively managing its electricity sales portfolio in response to wholesale market conditions, which are expected to persist with FY2021 and FY2022 Otahuhu futures prices increasing to $112/MWh and $103/MWh respectively as at 30 September 2019. This has seen the company bias sales towards higher-yielding spot and Commercial & Industrial channels.

Consistent with this strategy, Mercury has reduced discounted mass market acquisition activity while maintaining its focus on rewarding existing customers. The proportion of customers acquired on discounted rates decreased to 28% in Q1-FY2020 compared to 57% during the same period in FY2019. Additionally, the company did not renew an arrangement it had with Farm Source. The exit of this arrangement resulted in 3,000 customers (representing 8,000 connections) switching to other retailers in the 3 months to 30 September 2019. This predominantly dairy load imposed additional cost to Mercury as peak consumption coincides with seasonally low summer inflows into Mercury's Taupo catchment. Mercury's group churn increased from 19.9%3 in Q1-FY2019 to 22.0%3 in the current period in large part due to the exit of this Farm Source arrangement (underlying Mercury group churn was 19.8%3 after normalising for Farm Source).

Consequently, Mass Market sales volumes decreased by 63GWh and average yield for Mass Market sales increased by 1.4% to $129/MWh versus $127/MWh in the same quarter last year. Also, Commercial & Industrial sales increased by 83GWh from 588GWh to 671GWh with yield increasing by 6.7% from $83/MWh in Q1-FY2019 to $88/MWh in Q1-FY2020.

Urban sector leads demand higher; industrial demand flat despite moderate Tiwai increase

Demand increased by 0.2% on a temperature-adjusted basis (+0.5% on an unadjusted basis) in Q1-FY2020 primarily due to increased (+0.3%) urban sector demand. Industrial sector demand (+0.1%) was flat as increased Tiwai demand (up 4%) was offset by decreases from other industrial users. Rural sector demand (-0.1%) decreased while dairy (+0.0%), irrigation (-0.0%) and other (-0.1%) sector demand was stable.

1 For quarters ended 30 September since 1927
2 For quarters ended 30 September since 1999
3 12-month rolling average

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